Sunday, September 07, 2008

Russia wins another victory

On Friday morning I bought three newspapers at my local newsagent (no, I don't keep them in business, the various lottery and other ticket buyers do): the Daily Telegraph, the International Herald Tribune and the Wall Street Journal Europe. (Yes, I do recycle those newspapers when I have finished reading them – I have two cats.)

Then I looked at the headlines of one of the most important stories. Our own Daily Telegraph said in the Business section, which is the only part that is worth reading: "BP buries hatchet with Russians". Hmm, I thought, I wonder if the Russians have also buried the hatchet and in whose skull.

The Trib was a little more cautious: "BP reaches a truce in its Russian oil battle". [This article seems to have vanished into cyberspace but there are others out there.] Slim hope of hatchets being buried or peace pipes being smoked.

The Wall Street Journal Europe was the most sceptical and most informative of all: "BP keeps TNK-BP stakes but Russians gain clout". [The article is available to subscribers only.] There is a trick to being able to sum up your story in a headline and there is also a trick to understanding what happens in the world. I think it may be called journalism but I am no longer certain.

Well, now the story about TNK-BP, which we have written about before, has taken another turn and not for the better as far as BP is concerned. Although they have managed to keep 50 per cent of the joint venture, the WSJE maintains that the "deal clearly gives the Russian shareholder more clout". According to Deputy Prime Minister, Igor Sechin, this is "a positive signal for the Russian market".

In the deal, BP agreed to many of the terms set by its partners, a group of Soviet-born billionaires [an unfair comment since all Russian adults are Soviet-born but the hit is palpable] led by Mikhail Fridman of Alfa Group, Lev Blavatnik of Access Industries and Vikotr Vekselber of Renova, collectively known as AAR.

Their main demands, the removal of BP-nominated Chief Executive Robert Dudley, who is to leave by Dec. 1 under the deal, and consideration of an initial public offering of TNK-BP shares, now expected around 2010. BP won few, if any, concession in return, according to people close to the company. BP gave up its demand for the removal from top management jobs of Mr Vekselberg and another Russian shareholder, German Khan, both of whom BP and Mr Dudley accused of insubordination and acting against the interests of TNK-BP. AAR denied those accusations.
The Trib points out that BP has been allowed to retain "access to the large oil fields in Siberia that are one of the company’s most valuable assets". Of course, nobody quite knows how long that situation will last but, at present, the deal is presented as being very helpful to Western investors, as Mr Sechin pointed out. After all, BP's assets were not nationalized through a forced sale to a state company. Again, nobody can predict whether that will not happen some time in the near future.

At present, the Kremlin and its various proxies have had to deal with "slide in the Russian stock market and in investor confidence", consequent on the invasion of Georgia.

Past experience suggests that some investors will swallow any amount of punishment and will ignore all warnings in the hopes of at least some small profits to be made in the Russian energy sector (there not being a great deal else, since the arms manufacturing is not going to be opened up to Western investors).

The Telegraph said:
Meanwhile, fears about Russia’s conflict with Georgia have taken their toll, forcing the Russian central bank yesterday [Thursday] to support the rouble. Currency dealers said the central bank had sold up to $4bn (£2.3bn) in reserves in an attempt to halt the fall of the rouble, after foreign investors pulled capital from the country. The chairman of the central bank, Sergei Ignatyev, was reported as saying about $5bn left Russia last month. Analysts believe the real figure is much higher.
Also on Friday Kommersant was reporting that the Russian stock index was starting to move upwards but the road will be difficult. Other accounts were painting a much gloomier picture. The TNK-BP deal was needed by the Kremlin but whether its effect will be all that they hope for remains to be seen.

In the Comments session the Telegraph was sanguine though admonitory:

But for all AAR's hard-nosed manoeuvring, Hayward has managed to keep a large amount of influence over selection of a new chief executive. But even more crucially, in the face of a Russian state whose president's attitude to diplomacy is "Cold War? Bring it on", Hayward has retained ownership of its asset. No mean feat.

But it's also been a warning. BP can never again be so naive in dealing with Russia. It's had to make concessions and been pushed on to the back foot. It should have acted sooner to protect its interests while its counterparts were weaker.

Other western companies should learn from its mistakes. You need to be as much of a street fighter as a statesman to succeed in the former Soviet Union. It's all very well having had lawyers and injunctions at the ready to freeze assets of its Russian partners but it should never have come to that.

The Russians, however, have had to swallow another hard lesson, which is that the West's open capital markets and the institutions that populate them will turn their backs if certain rules of engagement are ignored. A big investment bank will probably value a long-term relationship with a BP over what could be a short, risky and potentially dangerous liaison with a belligerent Russia. Oh, and never, ever sign a 50:50 joint venture.
We suspect that BP will continue to behave with exemplary naiveté right up to the moment they are marched out of Russia completely. For the moment, it is a Russian victory but, as ever, with heavier losses for the country than is necessary. Not that the leadership cares.